What Are Futures?

A futures contract is an agreement between two parties to buy or sell an asset at a future date at a specific price. Breaking it down, one party agrees to buy a particular commodity at a specific price at a later date, while a second party “counterparty” agrees to sell the exact commodity purchased at the agreed price and at the agreed date.

In a futures contract, price is the only variable. They are standardized for quantity, quality, and delivery specifications. Because of this, futures contracts can be traded on an exchange.

This open auction market, often consisting of hundreds or thousands of participants, brings a large amount of liquidity to futures trading. In essence, the open auction process means that you can buy from any market participant, or sell to anyone looking to buy.

It’s important to note that some commodities–such as Crude Oil, Wheat, gold, among others–are physically deliverable while other contracts (such as index futures) can only be converted into cash equivalents.

Advantage Over Stocks

Whereas the price of a stock may be driven by the estimation of future earnings, the talent of corporate management, or the quality of products produced, futures prices are driven strictly by supply and demand. The aggregate belief of the market participants determines the supply/demand balance for each commodity.

This has an advantage over stocks in that there can be no manipulation of earnings or cover-ups of the material facts. The value of a gold contract, for example, depends on what market participants believe the price of gold will be when the contract expires.

If you believe the price of gold will be higher, you would buy the contract. If you believe it will be lower, you would sell it short. Being able to short sell is an opportunity to make money when a market declines, and sometimes markets fall faster than they rise!


Participants in Future Trading


These can vary from small farmers to large corporate commodity manufacturers (e.g. Gold miners). Their primary aim is to sell their commodities on the market. In order to protect their commodities against price against declines, they typically sell short futures to “lock-in” a favorable selling price.

Commercial Buyers 

These are typically larger manufacturers who buy commodities in order to produce another product. For example, they may buy corn and wheat in order to manufacture cereal. Their aim is to hedge against a price increase by purchasing futures contracts to “lock-in” a favorable buying price.


These can vary from small retail day traders to large hedge funds. Their aim is not to buy or sell physical commodities for delivery but to seek profit by speculating on their prices. Speculators comprise the largest group among market participants, providing liquidity to most of the commodity markets.


Each player has different objectives, different strategies, and a different time horizon for holding a futures contract. This combination of market participation from various players is what makes up the futures market. Furthermore, it creates an environment with plenty of opportunities for all.
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